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TRANSCRIPT
Eugène Karangwa
1
ESTIMATING THE COST OF PIPELINE
TRANSPORTATION IN CANADA
Eugène Karangwa, Transport Canada
INTRODUCTION
Pipeline transportation is an important sector in the Canadian
economy. Canada is a major energy producer in the world and
pipeline transportation is a practical and economical way of moving
large quantities of crude oil and natural gas.
In 2004, Transport Canada initiated a major project called the Full
Cost Investigation (FCI). The objective was to compute estimates of
the financial and social costs associated with transportation
infrastructures and services for passengers and freight. Pipeline
transportation was not part of the scope of the FCI project. The
purpose of the present paper is to generate estimates of the financial
costs associated to the pipeline transportation sector in order to
complement the initial FCI cost estimates. These costs include
capital costs and operating costs. As it was the case for the FCI
project, year 2000 is the base for the computations.
The rest of the paper is organized as follows: section two presents an
overview of the pipeline industry and section three presents results on
the financial costs of the pipeline industry for the year 2000.
PIPELINES AND ENERGY SECTOR OVERVIEW
Pipeline transportation is transportation of goods through a pipe.
Usually liquid and gases are transported in pipelines. Any chemically
stable liquid or gas can be moved through a pipeline but the most
Canadians employed in the year 2001, of which, more than 10 million
Canada is a major producer of crude oil and natural gas. Canada’s
crude oil production is derived from three principal sources:
conventional light and heavy oil deposits located in underground
pools or reservoirs in the Western Canadian Sedimentary Basin, non-
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conventional sources, including synthetic crude oil and bitumen, and
frontier deposits which are mostly offshore.
Canada is the world’s third largest producer of natural gas and the
seventh largest producer of crude oil. Undeveloped energy resources
include major crude oil and natural gas deposits in offshore areas in
the North, gas reserves in the Yukon and Northwest Territories, and
massive reserves of oil sands in Alberta. The building of the
Mackenzie gas project in Northwest Territories promises a significant
increase in the gas production by the year 2010.
Most Canadian crude oil production is transported from Edmonton,
Alberta. It is delivered to domestic and foreign refineries by three
major pipelines systems: Enbridge Pipelines Inc, TransMountain
Pipeline Company Ltd., and Express pipeline. A pipeline system
includes all parts of the physical facilities through which the product
moves, including line pipe, valves, pumping units, metering stations
and tanks.
Crude oil is processed in refineries to produce a wide range of
petroleum products required by consumers in the transportation,
residential, commercial, and industrial sectors. Refineries are
designed according to the kind of products they are intended to
provide, as well as to the nature and quality of the crude oil available
for processing.
Oil production in Western Canada has experienced record levels of
growth due to Alberta’s oil sand development. The continued growth
of oil production from oil sands means that Canada’s pipelines
infrastructure will have to expand. Pipeline capacity has increased by
over 550,000 barrels per day since late 1990’s to 2.5 millions barrels
per day. Some forecasts indicate that over the next ten years an
additional 600,000 barrels per day will be needed to satisfy the
market demand.1
1 This information is from “Pipelines in Canada”, by International
Business Strategies
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Most natural gas production comes from wells classified as gas wells,
while the rest comes from oil wells. In the case of gas produced from
oil wells, the hydrocarbons flowing from the well consist of a mixture
of natural gas and oil. Most oil production yields some gas. The gas
is dissolved within the oil and needs to be separated from it before it
is transported. This gas is called solution gas or associated gas.
Most natural gas wells produce some liquid hydrocarbons, which are
separated at the surface. These natural gas liquids and condensates
are counted as part of “crude oil and equivalent” production.
After processing, marketable gas is delivered by producers to high-
pressure steel pipeline systems. The natural gas is carried to large
industrial customers and local distribution companies. The seven
major natural gas pipeline companies in Canada are: Trans Canada
Pipelines Ltd., Westcoast Energy, Foothills Pipelines Ltd., TransGas
Limited, Union Gas, TransQuébec and Maritimes Pipeline Inc (TQM)
and Maritimes & Northeast Pipeline (MNP).
All provinces in Canada with the exception of Newfoundland and
Labrador and Prince Edward Island possess gas transport
infrastructures. British Columbia and Alberta are self-sufficient with
respect to gas. Most gas consumed in Central and Eastern Canada is
supplied by Alberta.
Provincial pipeline services are regulated by provincial authorities.
Interprovincial and international pipeline services are regulated by the
National Energy Board (NEB).
The Canadian Energy Pipelines Association (CEPA) is a major player
in the pipeline industry. Its members transport 97% of the crude oil
and natural gas produced in Canada..
CEPA full members are:
TransCanada
Enbridge
Spectra
Alliance
Kinder Morgan Canada
TransGas
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ATCO
Trans-Northern
Foothills
Trans Québec & Maritimes
Table 1 Gas and Oil Statistics for 2006
Natural gas
Total production 17.1 billion cubic feet/day
Total exports 9.6 billion cubic feet/day
Value of net exports $24.4billion
Total reserves 57.2 trillion cubic feet
Oil sector
Total production 2.6 million barrels/day
Total exports 1.8 million barrels/day
Value of total exports $39.3billion
Total reserves 179 billion barrels
Source: CEPA, An overview of the pipeline industry
Exhibit 1 Natural Gas Pipelines Map
6
Member Natural Gas Pipelines
Critical Part of Alberta’s Prosperity Infrastructure
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Source: CEPA, an overview of the pipeline industry
Exhibit 2 Oil Pipelines Map
Source: CEPA, an overview of the pipeline industry
Estimation of the financial costs of the pipeline industry
The estimation of the financial costs for the pipeline transport
industry is based on the whole pipeline network. This includes
gathering, transmission and distribution networks. In all these types
of pipeline networks, transportation is involved since the product is
being moved from point A to point B.
The computation of financial costs in the Full Cost Investigation
Project (FCI) includes three elements: the cost of physical assets, the
operating costs and the opportunity cost of land occupied by
transportation infrastructures. This same approach is applied to the
computation of financial costs for the pipeline industry.
77
P e m b in a
E n b r id g e
D u k e
B P T ra n s -N o r th e rn
H a rd is t y
E d m o n to n
C o ffe y vi lle
B ig S p ring
H o us to n
L o ng vie w
M e m b e r L iq u id s P ip e lin e s
C rit ic a l P a rt o f A lb e r ta ’s P ro s p e r ity In f ra s tru c tu re
K in d e r M o rg a n
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As physical assets generally have a useful life of many years, there is
a need to compute their annual cost with a method that makes the
distinction between the investment and the consumption of capital.
For the Full Cost Investigation Project, the method used was the
perpetual inventory method (PIM). This method is based on
historical time series of capital expenses by category of assets.
The PIM generates an estimate of the capital stock by accumulating
past purchases of assets taking into account asset lives and
depreciation. The essence of the perpetual inventory method is to add
investment expenditures to the capital stock each year and to subtract
depreciation. The PIM requires: information on the value of
investment, price indexes for capital goods, mean service lives, and
depreciation profiles.
The cost of capital is estimated by adding up:
1. The annual depreciation of the stock
2. The product of social opportunity cost of capital (SOCC) by
the capital stock calculated by the PIM.
The perpetual inventory method is used by Statistics Canada to
measure capital stocks by industry. Their results are used to have an
estimate of the capital stock for the pipeline industry.
The computation of the operating costs is based on Statistics Canada
data on financial expenses by Canadian firms involved in the pipeline
industry.
For the estimation of the opportunity cost of land, the FCI project
relied on a geographic information system. The approach is to use
the location of transportation infrastructures. The value of land is
then estimated depending on the unit costs of land. These unit costs,
measured in dollar per squared meter, vary depending on the over-
the-fence use of land (commercial, industrial, agricultural,
residential).
In the case of the pipelines industry, it was found out that all pipelines
regulated by the National Energy Board (NEB) are underground.
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This implies that certain activities can take place on the land above
the pipelines, reducing the opportunity cost of land used by pipelines.
However there is still an opportunity cost of land because certain
activities such as heavy construction would not be allowed on land
above the pipeline nor within a given right-of-way band along the
pipeline.
The pipeline right-of-way can be described as a controlled activity
area that includes the surface area directly above the pipeline and
some specified distance on either side of the pipeline. The right-of-
way must be wide enough to permit the pipeline operator reasonable
access to maintain the pipeline and to signal to others the existence of
the pipeline. The right-of-way agreement between the pipeline
operator and the landowner specifies activities or developments that
are prohibited on the right-of-way without prior approval from the
pipeline operator or that may not be allowed at all, for example
buildings and other structures.
In agricultural areas, once the pipeline is in the ground, normal
agricultural operations may continue unimpeded by the presence of
the pipeline. However, deep-rooting vegetation should be avoided,
since it could cause damage to the pipeline. Pathways, small playing
fields, park areas, and golf courses are generally acceptable.
The size of the right of way varies, but is generally a strip of land 20
metres wide which contains the pipeline, while on the either side of
the pipeline there is a safety zone that extends a further 30 metres
from the right of way, and on which activities are controlled.
Generally, activities taking place in the pipeline right of way are
restricted. Under the NEB Act, anyone proposing to construct a
facility across, on, along or under a pipeline, or excavate to a depth
greater than 30cm using power equipment or explosives within 30
metres of a pipeline right of way must obtain prior approval of the
pipeline company.
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Usually, companies tend to be accommodating when it comes to
allowing activity on right of ways, but they require to be notified of
any activity for security reasons, so they can approve it.
The geographic information data on the location of pipelines has not
yet been identified. Thus, it has not been possible to generate
numerical estimates of the opportunity cost of land used by the
pipeline industry yet.
It is expected that the opportunity cost of land varies depending on
the location of the pipeline. If for example, the pipeline is under
agricultural land, the opportunity cost is low since most of the
farming activities can carry on. The cost is higher when the land is
residential or industrial because heavy structures above the pipeline
are prohibited. A certain number of commercial activities non-
involving heavy structures can be allowed above and around the
pipeline location.
The cost of capital
Statistics Canada used the perpetual inventory method to calculate the
value of the capital stock for the pipelines transportation industry.
For year 2000 the estimation for the capital stock is $ 32,567.3
million. This value is in current dollars of 2000. This is equivalent to
constant dollars of 2000. The value of depreciation was computed
using straight-line depreciation. The value for the year 2000 is $
2,228.2 million. 2
The annual cost for capital is estimated using the following formula:
Annual Cost = depreciation + (capital stock x social
Opportunity cost of capital (SOCC) rate)
2 The value for the capital stock and depreciation are found in:
Statistics Canada, Fixed capital flows and stocks, pipeline
transportation.
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The social opportunity cost of capital measures the opportunity cost
of using capital for constructing pipelines. Society could use this
capital for other economic activities.
The value used for the SOCC by the FCI was 7.3% plus or minus
1.3% for sensitivity analysis.
Applying the above formula, the annual cost of capital lower value is:
$32,567.3 million x 6% +$2,228.2 million = $4,182.2 million
The base value is:
$32,567.3 million x 7.3% + $2,228.2 million = $4,605.6 million
The higher value is:
$32,567.3 million x 8.6% + $2,228.2 million = $5,028.9 million
The value of the capital stock estimated by Statistics Canada applies
to the whole pipeline transportation industry. There is no distinction
made between pipelines transporting natural gas and those
transporting oil.
In the present project we want to make the distinction between those
two types of pipelines. Gas pipeline companies may have to spend
more in capital equipment. For instance sometimes natural gas has to
be liquefied and transported as liquefied natural gas (LNG). This
method requires large facilities and specialized storage tanks.
The task of distinguishing the capital cost of natural gas and oil
pipelines companies is difficult because some companies are involved
in both sectors of activity. It is not possible to make the difference
between assets of the gas sector and assets of the oil sector.
A possible solution would be to estimate the capital stock of major
companies by using information contained in their financial
statements. It would be possible to make a distinction from the
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companies data and decide which part of the assets is allocated to the
gas sector and which part is allocated to the oil sector. However this
is made difficult by the fact that this information is often only
available for the most recent year and it’s not available at all for some
companies.
Finally, the solution has been to use information from the financial
data of Statistics Canada, where they publish separate financial
results for companies involved in natural gas pipeline transportation
and those active in the oil pipeline transportation sector. In the year
2000 the value of the net stock of capital at the book value for the gas
transportation sector was $34,940.3 million and it was $5,464.5
million for the oil transportation sector.3 The value of the capital
stock estimated using this methodology is higher than the value
obtained from the PIM method.
The reason is that the calculations in the second methodology are
based on all the assets of the companies involved in the survey
including non-transportation assets while the estimation based on the
PIM method involves only pipeline transportation assets. These
results imply that 86% of the capital stock belonged to gas
transportation companies and 14% to oil transportation companies.
This percentage is used to allocate the total capital stock estimated by
Statistics Canada with the PIM between gas companies and oil
companies:
Table 2 Estimated Annual Cost of Capital for Gas Pipeline Sector
and Oil Pipeline Sector (In 2000 $ million)
Sector of activity Low scenario Base scenario
High
scenario
Gas sector $3,596.7 $3,960.8 $4,324.9
3 This information comes from Statistics Canada, natural gas
transportation and distribution, catalogue no57-205-XIB and
Pipelines transportation of crude oil and refined petroleum products,
catalogue no 55-201-XIB.
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Oil sector $585.5 $644.8 $704.1
Total $4,182.2 $4,605.6 $5,029.0
Operating costs and total financial costs
Information on the operating costs for the gas pipelines transportation
sector and the oil pipelines transportation sector was derived from
Statistics Canada financial database.
Table 3 Operating Costs of the Natural Gas Pipelines Sector (in
2000 $million)
Transmission operations $1,167,026.0
Distribution operations $300,011.0
General and administrative $1,003,918.0
Maintenance expenses $239,329.0
Other expenses $571,252.0
Total expenses $3,281,536.0
Source: Statistics Canada, Natural gas transportation and distribution,
catalogue no 57-205-XIB
For the FCI project, depreciation expenses are subtracted from the
operating costs, because they are accounted for in the capital costs.
Similarly, the amount of $1,494.4 million has been subtracted from
the total expenses amount.
The operating costs for the oil pipelines transportation sector are
estimated in the same way:
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Table 4 Operating Costs of the Oil Pipeline Sector (in 2000 $
million)
Salaries and wages $127,734
Operating fuel and power $138,707
Materials and supply $61,385
Outside services $76,238
Other expenses $135,708
Taxes other than income taxes $98,439
Total operating expenses $638,211
Source: Statistics Canada, Pipeline transportation of crude oil and refined petroleum
products, catalogue no 55-201-XIB
To estimate the total financial cost, we have to add up the capital cost
and the operating cost.
Table 5 Estimated Total Financial Costs for the Pipeline
Transportation Industry (In 2000 $ million)
Sector of
activity Low scenario Base scenario
High
scenario
Gas sector $6,878.3 $7,242.4 $7,606.5
Oil sector $1,223.7 $1,283.0 $1,342.3
Total $8,102.0 $8,525.4 $8,948.7
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Estimation of the unit cost for the gas and oil pipeline
transportation sectors.
To estimate the cost per unit, we need to know the volume of the total
traffic of gas and oil transport systems in the year 2000. For the gas
transportation sector it was estimated at 259626 billion cubic metre-
kilometres and for the oil sector it was 107.2 billion cubic metre-
kilometres.4
Table 6 Estimated Unit Cost for the Gas and Oil Pipeline
Transportation Sectors (in $ per cubic metre-kilometre)
Low scenario Base scenario
High
scenario
Gas sector $0.000026 $0.000028 $0.000029
Oil sector $0.011415 $0.011968 $0.012521
As pipelines allow transporting very large quantities of gas and oil on
very long distances the unit cost of this transportation activity is very
low, almost zero as it is displayed in Table 6. For the gas pipeline
transportation sector the unit cost per cubic metre-kilometre is
$0.00006 in the base scenario. For the oil pipeline transportation, the
unit cost is $0.02 per cubic metre-kilometre.
Oil and natural gas can be transported by pipeline, road, rail or ship.
The most important determinant of the transportation mode is cost
effectiveness and accessibility. Gas and oil are transported in large
quantities and over long distances. For this reason, pipelines are the
most cost effective, energy efficient and safest means of
transportation.
Oil is generally transported by road or rail over shorter distances
when it is being gathered from production sites and when it is
4 These estimations are from Statistics Canada, Natural Gas
Transportation and Distribution, Cat no 57-205-XIB and Pipeline
Transportation of Crude Oil and Refined Petroleum Products, Cat 55-
201-XIB, 2001
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distributed to consumers. On shorter distances rail or road can be
more cost effective when transporting relatively small quantities of
the product. For natural gas, pipelines are by far the dominant way
when moving product from all phases of production: gathering from
producing regions to transmission /storage and to distribution to the
consumer.
The only other alternative to transporting natural gas by pipeline is to
compress and liquefy it under a great deal of pressure, and then
transport it in this state as what is called liquefied natural gas. This
procedure requires large facilities and specialized storage tanks and is
only economically viable when the quantity of gas is very large. This
method is used when it is not feasible to move natural gas by
pipeline, and generally involves natural gas being liquefied at a
terminal close to the site of production, transported by ship to a
receiving terminal where it is re-gasified and transported in a pipeline
network to the consumer. This method is still uncommon and by far
the largest volume of natural gas is transported exclusively in
pipelines.
Conclusion
The objective of the present study is to estimate the total financial
costs of the pipelines transportation industry. In the FCI project these
costs included capital costs, operating costs and the opportunity cost
of land. Because of the lack of information on the location of
pipelines it has not yet been feasible to compute numerical estimates
of the value of the land used for pipelines construction. Our estimate
of the financial costs accounts for the capital costs and the operating
costs. According to our estimates the total financial cost for natural
gas pipeline transportation companies varies from $ 6.8 billion and $
7.6 billion with a base value of $ 7.2 billion. The financial costs for
oil pipeline transportation companies vary between $1.2 billion and $
1.3 billion with $ 1.28 billion as the base value.
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References
Canadian Standards Association, Land use planning for pipelines: a
guideline for local authorities, developers, and pipeline operators,
2004.
CEPA (Canadian Energy Pipeline Association), An overview of the
pipeline industry, 2006. Available at: http://www.cepa.com
International Business Strategies, Pipelines in Canada, 2005.
Available at: http://www.internationalbusinessstrategies.com
Natural Resources Canada, Energy in Canada 2000.
Available at
http://www2.nrcan.gc.ca/es/ener2000/online/html/chap3_e.cfm
National Energy Board, 2006 Annual Report to parliament.
Available at http://www.neb-one.gc.ca/abouus/company_e.htm
Statistics Canada, Pipelines transportation of crude oil and refined
petroleum products, catalogue no55-201-XIB, 2001
Statistics Canada, Natural gas transportation and distribution,
catalogue no57-205-XIB, 2001
Statistics Canada, Investment flows and capital stocks, methodology,
2001.
Statistics Netherlands, Perpetual inventory method, service lives,
discards patterns, and depreciation methods, 1998.